In terms of newer themes, which are the sectors that will stand to benefit from this disruption?

There is a lot of opportunity in this supply chain disruption happening out of China. India is competing well with other nations to grab as much as it can from this supply chain dislocation. Clearly many of our competitors are way ahead of us in terms of infrastructure, in terms of ease of doing business, but collectively all our competitors put together do not have a large domestic market that India has. The government has taken many initiatives to popularise Make in India, and we believe there are two particular sectors — chemicals and contract manufacturing as well where there could be stupendous opportunity, just like the IT sector in 2000. In both these sectors, we are seeing expansion in global market shares, we are seeing emergence of large buyers just like we saw in the IT sector and we are seeing companies being able to scale their business multiple times from current turnovers if they follow the right path.

This kind of opportunity arises rarely for a sector. The way the IT sector converted the Y2K opportunity into building billion dollar businesses, we see companies in chemicals and contract manufacturing converting this Covid-19 into long-term value creation opportunity. Obviously, the market has recognised this, and in both these sectors, companies are trading at extremely high valuations. But the long-term growth opportunity in these two sectors is humungous. As government policy is unveiled for electronic sector, electrical sectors and defence sectors and so on and so forth, we will see opportunity arising in those sector as well, depending on how things get executed on the ground. One thing is to make an announcement and it is another thing is to actually make it work on the ground. So we will have to build our portfolios cleverly, looking at valuations as well as execution on the ground in those sectors where the government is providing incentives.

How are you assessing the auto names some of which already have the capacity when it comes to manufacturing?

I am only looking at profitability and valuation. All the things you have mentioned is part of that single lens to look at things. Based on that we believe two-wheelers, courtesy support from rural India, should be in a better position to normalise. Then comes companies that are at the entry level or at the lower end of the car market. Tractors are obviously doing well, and they are probably better than even two-wheelers. So it is tractors, two-wheelers, entry-level motor cars and commercial vehicles, which is going to take lot of time to normalise.

This is broadly the theme on the industry side, where July data has been better than June and June was better than May. But all those data are still at a significant discount to previous year’s number for the industry as a whole. Obviously, there are a few companies which have done exceptionally well in that environment. Some companies are gaining market share at cost of profitability, whereas others are maintaining profitability at the cost of market shares. So you are trying to evaluate two things – one where industry is normalising and the second where margins are normalising and trying to build position in the auto sector.

When markets are going higher, normally mutual funds get inflows. But June and July have been the other way round for the industry. What is the right way of looking at it?

By now, the mutual fund industry has more than 8 crore folios. So there is no homogenous crowd. There are multiple reasons why we are seeing outflows from equity funds for the first time in four years. One could be that people are actually redeeming money, because they believe the market has risen and mutual funds from the bottom would have delivered anywhere between 35-40% returns. Second could be that people are actually redeeming money to put into their businesses, for their livelihood and so and so forth. Third could be that some investors are saying that oh! I can trade directly in the market and make better returns than mutual funds. So they may have gone for some redemptions. Fourth, and probably one of the biggest reasons, is that while a lot of businesses have shifted digitally, there is a large part of India where physical contact is necessary for investment decisions. In March end, April and May, mobility was restricted. In June and July, mobility improved but it did not improve to the extent it was before pre-Covid. So hundreds of thousands of mutual fund distributors were not able to reach to their customers and get their applications for investment. So put all these things together, there are multiple reasons which resulted in mutual fund flows turning negative for the first time in equity funds after a gap of four years. The good point in all these is that SIPs are still holding on. SIP flow has not reduced as much as overall flows have. The faith of hundreds of investors in SIPs remains robust.

If you really have to bet on one or two out-sized themes, the themes which will make money for three, four, five, seven years which would be those out-sized themes you would pick?

One bottom-up, rather than top-down ideas, would be to buy quality companies run by good managers, where growth is available in plenty. So if you can lay your hands on the next Azim Premji’s, Shiv Nadar’s and Narayana Murthy’s in chemicals and speciality chemicals space, or in contract manufacturing space, I am sure the net experience will be as rewarding as investing in these companies during the IT boom. Now if you remember, the IT sector moved from 1997 to 2000 like a rocket, saw a sharp fall between 2000 and 2001 and 2001 onwards it was a recovery. It was not a straight line journey in the IT sector. There were ups and downs, because of market requirements or market factors. The same trends will occur in chemicals and contract manufacturing sectors also. But if you can identify right companies and right entrepreneurs and stay with the volatility of the market, I am sure this experience will be as rewarding.